A budget is a set of interlinked plans that quantitatively describe an entity's projected future operations. A budget is used as a yardstick against which to measure actual operating results, for the allocation of funding, and as a plan for future operations.

The budgeting process typically begins with a strategy planning session by senior management. The management team then applies the agreed strategic direction to a series of plans that roll up into a master budget. The plans include a sales budgetproduction budgetdirect material budgetdirect labor budget, manufacturing overhead budget, selling and administrative expense budget, and fixed assets budget. All of these plans roll up into the master budget, which contains a budgeted income statement, balance sheet, and cash forecast. There may also be a financing budget in which is itemized the debt and equity structure needed to ensure that the cash requirements of the budget can be met.

A budget is subject to a number of problems, such as the "use it or lose it" mentality, whereby managers spend all funds allocated to their departments on the grounds that those expenditures form the basis for their budgets in the following year; not spending all allocated funds will therefore mean that the budget will likely be reduced in the following year.

Related Courses

Capital Budgeting